Tax Credits: Recent North Carolina ALJ Decision Could Impact Numerous Taxpayers

On Aug. 17, 2020 a North Carolina Administrative Law Judge ruled against the taxpayer who was a member in a limited liability company which allocated solar tax credits to the taxpayer.[1] The taxpayer had claimed these credits to offset their North Carolina gross premium tax liabilities for the 2014 through 2016 tax years. Ruling in favor of the North Carolina Department of Revenue, the Judge stated that the taxpayer was not entitled to such credits.

The taxpayer served as an investor member in a partnership. According to a Private Placement Memorandum filed in a related court case, “the primary benefit to an Investor Member will be North Carolina tax savings expected to result from the allocation to the Investor Member of its share of the Company’s State Tax Credits which may be applied against the Investor Member’s NC Tax liability.”[2] This type of structure is common in the renewable energy industry.

In order to receive renewable energy tax credits, the taxpayer must have constructed, purchased or leased renewable energy property [to be] allowed a credit equal to 35 percent of the cost of the property if the property is placed in service during the taxable year.[3] Judge Bawtinhimer concluded that the taxpayer’s investment was not in renewable energy property itself, but rather in the credits that the property generated, therefore the taxpayer’s investment does not meet the criteria for obtaining any tax credits for investing in renewable energy property.

This case does not represent the same facts and circumstances of many other solar partnerships that generated state tax credits in North Carolina but may give indications into what the NCDOR would look at if other structures are audited. The taxpayer has 30 days to appeal Judge Bawtinhimer’s decision by filing a Petition for Judicial Review in the Superior Court of Wake County. However, before filing this petition, the taxpayer must pay the amount stated in the Notice of Final Determination (which is in excess of $23 million) plus any interest that will continue to accrue until such amount is paid.

References:

[1] North Carolina Farm Bureau Insurance Company, Inc. v. NCDOR, 19 Rev 00430 (NC Office of Administrative Hearing).

[2] Document filed August 25, 2020 Monarch Tax Credits, LLC s. NCDOR, 19 CVS 12647.

[3] N.C. Gen. Stat. §105-129.16A(a).

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